Wednesday, July 31, 2013

“Paul Davidson assumes that Keynes’s and Shackle’s views are the same. The Post Keynesians DO NOT accept the concept of uncertainty coming in different grades or gradations. They fall back on Shackle’s own words … – Uncertainty is the opposite of certainty. … There is nothing in between certainty and uncertainty. This, of course, leads to complete nihilism. The Post Keynesian school is doomed intellectually because it does not have a solid foundation to deal with uncertainty as a range. Radical uncertainty only has import in decisions involving innovation/long run capital investment. Any attempt to put it at the center of decision making leads to intellectual chaos.”
Michael Emmett Brady, April 21, 2008
http://www.amazon.com/review/R1S4VWTIJF8J6O/

If this is supposed to be interpreted as the assertion that no Post Keynesian has ever recognised grades/degrees of uncertainty, then it is plainly false.

Some straightforward evidence:

(1) Dow (1995) is an explicit recognition of the idea that Keynesian uncertainty comes in degrees, on the basis of the Treatise on Probability and Keynes’s concept of the weight of evidence. Dow (1995: 119–120) notes that the weight of evidence “allows understanding of uncertainty as a relative concept,” and that this idea of relative uncertainties was an important, but neglected, aspect of Keynes’s famous 1937 article “The General Theory of Employment” (Keynes 1937). See also Dow (1994).

(2) Here is Jesper Jespersen:

“Uncertainty is caused by lack of information. Therefore uncertainty might have different intensities or ‘stats of confidence’. You may feel(!) more or less uncertain, but except for rare cases all individual activities are characterized by (different degrees of) uncertainty, because one cannot know nor estimate the exact outcome. Hence, expectations are uncertain due to this inherent lack of information (and a constantly changing environment).” (Jespersen 2009: 8).

(3) Here is Lars Syll:

“To Keynes expectations are a question of weighing probabilities by ‘degrees of belief,’ beliefs that often have preciously little to do with the kind of stochastic probabilistic calculations made by the rational agents as modeled by ‘modern’ social sciences. Although (I think) I agree with Sheila that Keynesian uncertainty can come in different degrees or grades, I wouldn’t overemphasis the reach of that kind of differentiated uncertainty concept. Institutions, animal spirits, conventions, history, social norms and models MAY help us decide and act – but much of the time we ‘simply do not know’ because of the way the world works.”http://larspsyll.wordpress.com/2013/07/17/is-libertarian-freedom-free-of-charge/#comment-5948

I am unsure whether M. Crocco self-identifies as a Post Keynesian, but Crocco (2002) and (2000) make it clear that he too understands that Keynesian uncertainty comes in degrees.

Clearly, degrees or grades of uncertainty are recognised by some Post Keynesians, and I would concur that this is the correct way to see uncertainty: when you have merely epistemic probabilities derived from inductive arguments, and no objective probabilities (either in an a priori or relative frequency sense) can be given, then the probability of an inductive inference also comes with some degree of uncertainty, from low to very high (depending on the particular argument).

When one has no relevant or convincing evidence on which to make an inductive argument, one would face total or radical uncertainty. Exactly when and in what circumstances one does face radical uncertainty, of course, could be a matter of some dispute.

But it is clear that the notion of grades/degrees of uncertainty is the key to understanding this fundamental passage in Keynes’s article “The General Theory of Employment” (1937):

“By ‘uncertain’ knowledge, let me explain, I do not mean merely to distinguish what is known for certain from what is only probable. The game of roulette is not subject, in this sense, to uncertainty; nor is the prospect of a Victory bond being drawn. Or, again, the expectation of life is only slightly uncertain. Even the weather is only moderately uncertain. The sense in which I am using the term is that in which the prospect of a European war is uncertain, or the price of copper and the rate of interest twenty years hence, or the obsolescence of a new invention, or the position of private wealthowners in the social system in 1970. About these matters there is no scientific basis on which to form any calculable probability whatever. We simply do not know.” (Keynes 1937: 213–214).

The outcome in a (fair) game of roulette can be calculated in an objective sense though a priori probabilities, so it is clear Keynes is excluding mathematical or physical probabilities here.

But then he mentions three examples where he seems to be talking about degrees of uncertainty:

(1) the prospect of a Victory bond being drawn;

(2) the expectation of life (only slightly uncertain);

(3) the weather (only moderately uncertain).

I am not quite sure what Keynes meant by “the expectation of life,” but these examples seem generally to be epistemic probabilities, with varying degrees of (non-objective) probability and uncertainty attached to them.

Then, finally, are Keynes’s examples of “matters [sc. where] there is no scientific basis on which to form any calculable probability whatever”:

(1) the prospect of a European war (considered, we should remember, in 1937!)

(2) the price of copper and the rate of interest twenty years hence;

(3) the obsolescence of a new invention;

(4) the position of private wealthowners in the social system in 1970.

These would appear to be examples of radical uncertainty in Keynes’s view.

Tuesday, July 30, 2013

Austrians think Hoover’s “high wage” policy was a major cause of exacerbating the Great Depression, as can be seen in this video by Steve Horwitz (and in the ones that follow in the play list).

While I would not deny it had a negative effect, the trouble with this interpretation is the following:

(1) Hoover’s policy was largely limited to certain industrial markets, and was not generally forced on industrialists.

On November 21 1929, Hoover met with business leaders and labor representatives in the White House. The press release makes interesting reading:

“The conference this morning of 22 industrial and business leaders warmly endorsed the President’s statement of last Saturday as to steps to be taken in the progress of business and the maintenance of employment. The general situation was thoroughly canvassed, and it was the unanimous opinion of the conference that there was no reason why business should not be carried on as usual; that construction work should be expanded in every prudent direction both public and private so as to cover any slack of unemployment. It was found that a preliminary examination of a number of industries indicated that construction activities can in 1930 be expanded even over 1929. ….

It was considered that the absorption of capital in loans on the stock market had postponed much construction and that the flow of this capital back to industry and commerce would now assist renewed construction.

It was the opinion that an indirect but very substantial contribution could be made to the extension of credit for local building purposes and for conduct of smaller business if the banks would freely avail themselves of the rediscount privilege offered by the Federal Reserve Banks.

The meeting considered it was desirable that some definite organization should be established under a committee representing the different industries and sections of the business community, which would undertake to follow up the President’s program in the different industries.

It was considered that the development of cooperative spirit and responsibility in the American business world was such that the business of the country itself could and should assume the responsibility for the mobilization of the industrial and commercial agencies to those ends and to cooperate with the governmental agencies. ….

The President was authorized by the employers who were present at this morning’s conference to state on their individual behalf that they will not initiate any movement for wage reduction, and it was their strong recommendation that this attitude should be pursued by the country as a whole. They considered that aside from the human considerations involved, the consuming power of the country will thereby be maintained.

The President was also authorized by the representatives of labor to state that in their individual views and as their strong recommendation to the country as a whole, that no movement beyond those already in negotiation should be initiated for increase of wages, and that every cooperation should be given by labor to industry in the handling of its problems.” http://www.presidency.ucsb.edu/ws/?pid=22009

So the “high wage” policy was not some alien, evil government intervention imposed on unwilling and hostile business people and industrialists: it was a policy they largely agreed with.

Vedder and Galloway (1997: 92) – who themselves think that the high wages were the major cause of the unemployment during the depression – nevertheless point out that Hoover received “wholehearted support” from businessmen at his White House meeting on November 21, 1929. Even Henry Ford agreed with it (Vedder and Galloway 1997: 92).

Furthermore, even though there was some degree of “jawboning” of certain business people who wished to cut wages,

“In a survey of business leaders in mid-1930 by Printer’s Ink magazine, corporate executives were near-unanimous in their support of the high-wage policy coming out of the November 1929 conference at the White House. Howard Heinz, the ketchup maker, said: ‘In this enlightened age, large manufacturers . . . will maintain wages ... as being the far-sighted and . . . the constructive thing to do.’ Carleton Palmer, president of E. R. Squibb & Son, advocated increasing hourly wages by reducing the workweek and maintaining weekly wages constant. William Wrigley, the gum magnate, said he would not reduce wages, while Charles C. Small, president of the American Ice Co., said he believed in ‘good wages to aid purchasing power.’ George F. Johnson, president of Endicott Johnson Corp., echoed that sentiment, declaring that ‘reducing income of labor is not a remedy for business depression; it is a direct and contributing cause.’

Big business felt it had a duty to carry through the high-wage-policy.” (Vedder and Galloway 1997: 94)

Now let us assume for the sake of argument that the “high wage” policy really was the single worst policy endorsed by Hoover. But why aren’t Austrians blaming the private industrialists and business people who supported and endorsed this “high wage” policy, since it was clearly their fault as much as Hoover’s? It is doubtful that the “high wage” policy could have been carried out without so much support from the private sector.

Yet in his video “Hoover’s Labor Market Policies” (in the playlist above), Horwitz says that Hoover “persuaded” industrial leaders with the “power of the presidency” not to cut wages, as if this was against their will or against their better judgement. That is untrue: in fact, very many corporate leaders already held the same opinion as Hoover.

(2) Gardiner Means, in his own contemporary work on prices in the 1930s, noted how it was in fact industrial prices that were relatively less flexible than other prices in the US economy during the early years of the Great Depression (Lee 1998: 28).

So, given that relative inflexibility in industrial prices, to what extent did the high wages per se with (less severe) price cuts in those industries really exacerbate the depression? Although it stands to reason that, when industrial prices did start to fall significantly, this would have squeezed profits in the relevant industries, the fact is that output and employment was already directly reduced in many firms anyway as a response to the demand shocks, which were the primary cause of the increased unemployment.

(3) Far from being the solution to the depression, severe wage cuts even in 1929 would have severely worsened the debt deflationary spiral and increased the real burden of debt for debtors, putting pressure on them and eventually driving many into bankruptcy, and in turn driving creditors into bankruptcy. Of course, that is exactly would did happen in the depression as nominal wages fell after 1931 and continued to fall in 1932 and 1933.

(4) I need hardly add that the marginal revenue product theory of wages is wrong, since wages are socially and institutionally determined. It is also nothing short of an article of faith that wages tend to towards some market-clearing level in modern capitalist societies.

The inducement to investment and employ workers is so much more complex than the dynamics of the price of labour analysed as movements along a demand curve under the ceteris paribus assumption. Aggregate demand for output is a fundamental driver of production and employment (Lavoie 1992: 219–220), and the demand shocks resulting from pessimistic expectations (increased savings), falling consumption, loss of savings from bank collapses, and debt deflationary dynamics seem a far more plausible explanation of most of the unemployment during the depression. The US, for example, had a strong (though, admittedly, far from complete) economic recovery after 1933 even though real wages were rising (Bernanke 2000: 31). Clearly, rising average real wages do not necessarily have to result in increased unemployment (see Keynes [1939] for his recantation of neoclassical marginal revenue product theory).

Update
Daniel Kuehn draws attention to these important articles relevant to this issue, one of them by him:

Rose, J. D. 2010. “Hoover’s Truce: Wage Rigidity in the Onset of the Great Depression,” Journal of Economic History 70: 843-870.

Kuehn, Daniel. 2012. “A Critique of MacKenzie, Not an Endorsement of Hoover: Reply to Vedder and Gallaway,” The Quarterly Journal of Austrian Economics 15.1: 442-453.

(1) Post Keynesians (and philosophers of probability, mathematicians and economists generally) have not understood Keynes’s Treatise on Probability properly, and in particular his idea of relegating the frequentist interpretation of probability to a highly limited domain, and that non-objective probabilities (in the sense of non-a priori probabilities or non-relative frequency probabilities) can nevertheless be mathematically represented with imprecise, interval estimates (apparently called “approximation” by Keynes), the first explicit such interval estimate, lower-upper bound model of probability, developed from George Boole’s calculus in The Laws of Thought (1854).

This forms the basis of Keynes’s decision-making theory, with mathematics behind it, superior to the Ramsey/Savage/neoclassical EUT and consistent with Daniel Ellsberg’s decision making theory.

(2) Brady contends that Post Keynesians misunderstand Keynes’s conception of uncertainty, and do not recognise grades/degrees of uncertainty:

“Paul Davidson assumes that Keynes’s and Shackle’s views are the same. The Post Keynesians DO NOT accept the concept of uncertainty coming in different grades or gradations. They fall back on Shackle’s own words … – Uncertainty is the opposite of certainty. … There is nothing in between certainty and uncertainty. This, of course, leads to complete nihilism. The Post Keynesian school is doomed intellectually because it does not have a solid foundation to deal with uncertainty as a range. Radical uncertainty only has import in decisions involving innovation/long run capital investment. Any attempt to put it at the center of decision making leads to intellectual chaos.”
Michael Emmett Brady, April 21, 2008
http://www.amazon.com/review/R1S4VWTIJF8J6O/

That is, Brady contends that Paul Davidson’s interpretation and version of Keynes’s D-Z model is wrong, and that Post Keynesians have not properly understood Chapters 20 and 21 of the General Theory and that Keynes had a sophisticated mathematical model in those chapters.

While charge (1) is probably true, I think it is clear that charge (2) is false: there are Post Keynesians who do recognise degrees of uncertainty, such as, for example, Dow (1994 and 1995), Jespersen (2009: 8), Lars Syll, and (if he self-identifies as a Post Keynesian) Crocco (2002).

If correct, this is an important paper, which confirms Keynes’s genius, not only in the neglected Treatise on Probability (1921), but also in decision making theory, in that Keynes is the founder of modern non-additive, nonlinear probability and decision making theory, and provided it with a mathematical foundation (Brady and Arthmar 2012: 65).

I will not attempt to do anything more than sketch what appear to be the main points, as follows:

(1) Keynes thought only a certain class of probabilities were capable of objective numeric estimates, such as those with equiprobable outcomes with use of the principle of indifference (Brady and Arthmar 2012: 70). Nor did Keynes reject the relative frequency approach as long as it was confined to instances where it was appropriate. The laws of the probability calculus hold only in cases where probabilities are linear and have additive, precise values (Brady and Arthmar 2012: 80).

My additional reading is that, in Keynes’s view, when a probability is not objective in the sense that it is (1) a priori or (2) derived from a relative frequencies, if it can given at all it is non-numeric or represented as an approximate interval. I would assume that such non-numeric and interval probabilities apply to what are now called epistemic probabilities which we attach to the conclusions of inductive arguments.

(2) Keynes did provide a mathematical structure for his approach to probability, including his interval estimates, adopted from the work of Boole (Brady and Arthmar 2012: 69–70). When such probabilities are non-linear and non-additive, they do not follow the laws of the probability calculus (Brady and Arthmar 2012: 80). Some have incorrectly thought Keynes’s non-numeric probabilities were only capable of ordinal ranking, and then only some of the time.

(3) While Keynes briefly sketched his general approach to probability in Chapter 3 of the Treatise, the important and neglected treatment in detail occurred in Part II from Chapters 15 to 29 (Brady and Arthmar 2012: 71).

(4) Brady and Arthmar (2012: 76) point to this passage in Chapter 15 of the Treatise on Probability that summarises Keynes’s view:

“5. It is evident that the cases in which exact numerical measurement is possible are a very limited class, generally dependent on evidence which warrants a judgment of equiprobability by an application of the Principle of Indifference. The fuller the evidence upon which we rely, the less likely is it to be perfectly symmetrical in its bearing on the various alternatives, and the more likely is it to contain some piece of relevant information favouring one of them. In actual reasoning, therefore, perfectly equal probabilities, and hence exact numerical measures, will occur comparatively seldom.

The sphere of inexact numerical comparison is not, however, quite so limited. Many probabilities, which are incapable of numerical measurement, can be placed nevertheless between numerical limits. And by taking particular non-numerical probabilities as standards a great number of comparisons or approximate measurements become possible. If we can place a probability in an order of magnitude with some standard probability, we can obtain its approximate measure by comparison. (Keynes 1921: 160).

(5) Ramsey’s reviews of Keynes’s Treatise on Probability badly misunderstood the latter’s approach to probability, and that misunderstanding was passed on to many subsequent commentators (Brady and Arthmar 2012: 79).

Sunday, July 28, 2013

P. L. Barrotta (1996) provides what at first sight is a strange enterprise: a neo-Kantian critique of Mises’s epistemology and his basis of praxeology.

But wasn’t Mises’s epistemology essentially derived from Kantianism?

Barrotta contends that, although Mises was influenced by Kantianism, in fact his epistemology badly misunderstood Kant and can be refuted from a Kantian perspective.

Note that this critique is valid even if one thinks that synthetic a priori knowledge exists.

In short, Barrotta argues as follows:

(1) The human action axiom is not sufficient to deduce even basic “laws” or principles of economics (Barrotta 1996: 57). In particular,

“The concept of human action appears to be a prerequisite of any economic model, even those which are mutually incompatible. The existence of mutually incompatible economic models that are grounded on the Misesian concept of action suggests that this concept cannot provide the only premise of those models. Confronted with this difficulty we can only conclude that (a) Mises’s ‘human’ action does not provide the only premise of economic models, or (b) it does not provide a premise at all. Point (b) represents the most radical departure from Mises’s epistemology. Nonetheless, and interestingly enough, it does follow from Kant’s philosophy …” (Barrotta 1996: 57).

While Kant’s categories can be construed as fundamental principles underlying experience and perception of reality, they do not provide the axioms of natural or social scientific theories (Barrotta 1996: 58). Mises’s attempt to found an economic theory on Kantian categories was a mistake.

(2) As proof of the argument of (3), Barrotta notes how Mises could not derive certain additional postulates from the action axiom, such as the disutility of labour axiom, which even Mises (2008: 65) admitted was empirical.

(3) Finally, Barrotta argues that what Mises called “deduction” is not deduction in the accepted sense. When Mises asserted that praxeology deduces from the action axiom by “drawing out” the concepts inherent in that axiom, this type of “verbal logic” does not even follow the deductive rules of inference (Barrotta 1996: 64).

Saturday, July 27, 2013

A reading of the opening chapters of Mises’s Human Action does not provide straightforward answers.

First, consider these statements:

“Praxeology is a theoretical and systematic, not a historical, science. Its scope is human action as such, irrespective of all environmental, accidental, and individual circumstances of the concrete acts. Its cognition is purely formal and general without reference to the material content and the particular features of the actual case. It aims at knowledge valid for all instances in which the conditions exactly correspond to those implied in its assumptions and inferences. Its statements and propositions are not derived from experience. They are, like those of logic and mathematics, a priori. They are not subject to verification and falsification on the ground of experience and facts. They are both logically and temporally antecedent to any comprehension of historical facts. They are a necessary requirement of any intellectual grasp of historical events” (Mises 2008: 32).

“Even the most faithful examination of a chapter of economic history, though it be the history of the most recent period of the past, is no substitute for economic thinking. Economics, like logic and mathematics, is a display of abstract reasoning. Economics can never be experimental and empirical. The economist does not need an expensive apparatus for the conduct of his studies. What he needs is the power to think clearly and to discern in the wilderness of events what is essential from what is merely accidental” (Mises 2008: 864).

“What assigns economics its peculiar and unique position in the orbit both of pure knowledge and of the practical utilization of knowledge is the fact that its particular theorems are not open to any verification or falsification on the ground of experience. Of course, a measure suggested by sound economic reasoning results in producing the effects aimed at, and a measure suggested by faulty economic reasoning fails to produce the ends sought. But such experience is always still historical experience, i.e., the experience of complex phenomena. It can never, as has been pointed out, prove or disprove any particular theorem. The application of spurious economic theorems results in undesired consequences. But these effects never have that undisputable power of conviction which the experimental facts in the field of the natural sciences provide. The ultimate yardstick of an economic theorem’s correctness or incorrectness is solely reason unaided by experience” (Mises 1949: 858).

So here we are told that the “theorems” of praxeology “are not open to any verification or falsification on the ground of experience.” The “statements and propositions” of praxeology are “not derived from experience.” If this means that the deductions that constitute praxeological theories are true a priori, then Mises is saying that praxeology knowledge has necessary, a priori truth.

But, in addition to being valid and sound, a deductive argument could only have absolute certainty if its axioms and premises are all necessarily true.

But Mises admits that praxeology uses synthetic a posteriori premises and assumptions in its arguments:

“Man … can never be absolutely certain that his inquiries were not misled and that what he considers as certain truth is not error. All that man can do is to submit all his theories again and again to the most critical reexamination. This means for the economist to trace back all theorems to their unquestionable and certain ultimate basis, the category of human action, and to test by the most careful scrutiny all assumptions and inferences leading from this basis to the theorem under examination. It cannot be contended that this procedure is a guarantee against error. But it is undoubtedly the most effective method of avoiding error” (Mises 2008: 68).

“Every theorem of praxeology is deduced by logical reasoning from the category of action. It partakes of the apodictic certainty provided by logical reasoning that starts from an a priori category. Into the chain of praxeological reasoning the praxeologist introduces certain assumptions concerning the conditions of the environment in which an action takes place. Then he tries to find out how these special conditions affect the result to which his reasoning must lead. The question whether or not the real conditions of the external world correspond to these assumptions is to be answered by experience. But if the answer is in the affirmative, all the conclusions drawn by logically correct praxeological reasoning strictly describe what is going on in reality” (Mises 1978: 44).

The idea that every “theorem of praxeology is deduced by logical reasoning from the category of action” and thus has “apodictic certainty” could only be true if all premises – both hidden and stated – in deductions are also absolutely true (as merely analytic a priori propositions) and all arguments were valid and sound.

But that argument will not work, because Mises has admitted that praxeological reasoning requires synthetic a posteriori propositions which can never be necessarily true or free from at least some small degree of doubt about their truth. Therefore no derived deduction or theory can have true “apodictic certainty”: this is a wild fantasy of Mises.

Now Mises believes in categories of the human mind and that the action axiom is a category:

“the problem of the a priori is of a different character. It does not deal with the problem of how consciousness and reason have emerged. It refers to the essential and necessary character of the logical structure of the human mind.

The fundamental logical relations are not subject to proof or disproof. Every attempt to prove them must presuppose their validity. It is impossible to explain them to a being who would not possess them on his own account. Efforts to define them according to the rules of definition must fail. They are primary propositions antecedent to any nominal or real definition. They are ultimate unanalyzable categories. The human mind is utterly incapable of imagining logical categories at variance with them. No matter how they may appear to superhuman beings, they are for man inescapable and absolutely necessary. They are the indispensable prerequisite of perception, apperception, and experience.” (Mises 2008: 34).

“The human mind is not a tabula rasa on which the external events write their own history. It is equipped with a set of tools for grasping reality. Man acquired these tools, i.e., the logical structure of his mind, in the course of his evolution from an amoeba to his present state. But these tools are logically prior to any experience.

Man is not only an animal totally subject to the stimuli unavoidably determining the circumstances of his life. He is also an acting being. And the category of action is logically antecedent to any concrete act.

The fact that man does not have the creative power to imagine categories at variance with the fundamental logical relations and with the principles of causality and teleology enjoins upon us what may be called methodological apriorism.

Everybody in his daily behavior again and again bears witness to the immutability and universality of the categories of thought and action. He who addresses fellow men, who wants to inform and convince them, who asks questions and answers other people's questions, can proceed in this way only because he can appeal to something common to all men--namely, the logical structure of human reason. The idea that A could at the same time be non-A or that to prefer A to B could at the same time be to prefer B to A is simply inconceivable and absurd to a human mind. We are not in the position to comprehend any kind of prelogical or metalogical thinking. We cannot think of a world without causality and teleogy.” (Mises 2008: 35).

“Aprioristic reasoning is purely conceptual and deductive. It cannot produce anything else but tautologies and analytic judgments. All its implications are logically derived from the premises and were already contained in them. Hence, according to a popular objection, it cannot add anything to our knowledge.

All geometrical theorems are already implied in the axioms. The concept of a rectangular triangle already implies the theorem of Pythagoras. This theorem is a tautology, its deduction results in an analytic judgment. Nonetheless nobody would contend that geometry in general and the theorem of Pythagoras in particular do not enlarge our knowledge. Cognition from purely deductive reasoning is also creative and opens for our mind access to previously barred spheres. The significant task of aprioristic reasoning is on the one hand to bring into relief all that is implied in the categories, concepts, and premises and, on the other hand, to show what they do not imply. It is its vocation to render manifest and obvious what was hidden and unknown before.” (Mises 2008: 38).

“The scope of praxeology is the explication of the category of human action. All that is needed for the deduction of all praxeological theorems is knowledge of the essence of human action. It is a knowledge that is our own because we are men; no being of human descent that pathological conditions have not reduced to a merely vegetative existence lacks it. No special experience is needed in order to comprehend these theorems, and no experience, however rich, could disclose them to a being who did not know a priori what human action is. The only way to a cognition of these theorems is logical analysis of our inherent knowledge of the category of action. We must bethink ourselves and reflect upon the structure of human action. Like logic and mathematics, praxeological knowledge is in us; it does not come from without.

All the concepts and theorems of praxeology are implied in the category of human action.” (Mises 2008: 64).

“… it is expedient to establish the fact that the starting point of all praxeological and economic reasoning, the category of human action, is proof against any criticisms and objections. No appeal to any historical or empirical considerations whatever can discover any fault in the proposition that men purposefully aim at certain chosen ends. No talk about irrationality, the unfathomable depths of the human soul, the spontaneity of the phenomena of life, automatisms, reflexes, and tropisms, can invalidate the statement that man makes use of his reason for the realization of wishes and desires. From the unshakable foundation of the category of human action praxeology and economics proceed step by step by means of discursive reasoning. Precisely defining assumptions and conditions, they construct a system of concepts and draw all the inferences implied by logically unassailable ratiocination. With regard to the results thus obtained only two attitudes are possible; either one can unmask logical errors in the chain of the deductions which produced these results, or one must acknowledge their correctness and validity.” (Mises 2008: 67).

From these statements, it is clear that Mises is influenced by a Kantian or, more correctly, neo-Kantian epistemology (Lachmann 1976: 56; Rothbard 2011: 108) of the Marburg school.

The human action axiom can be stated as follows:

(1) All human action is rational.

That statement when asserted without defining “rational” is likely to provoke derision, because if by “rational” we mean consistent with the laws of logic and characterised by valid and sound deductive and inductive reasoning, then there are manifestly many examples of irrational human behaviour.

But Mises has his own idiosyncratic definition of “rational”: he means with a purpose, or end in mind.

Therefore the proposition is to be rewritten:

(1) All human action is purposeful, in the sense of having a purpose or end in mind.

But even here problems exist. What about unconscious and involuntary behaviour? What about behaviour of mentally ill human beings? What about nervous tics?

Mises is already required to carefully limit what he means by “human action”:

“Human action is purposeful behavior. Or we may say: Action is will put into operation and transformed into an agency, is aiming at ends and goals, is the ego’s meaningful response to stimuli and to the conditions of its environment, is a person’s conscious adjustment to the state of the universe that determines his life. Such paraphrases may clarify the definition given and prevent possible misinterpretations. But the definition itself is adequate and does not need complement of commentary.

Conscious or purposeful behavior is in sharp contrast to unconscious behavior, i.e., the reflexes and the involuntary responses of the body’s cells and nerves to stimuli. People are sometimes prepared to believe that the boundaries between conscious behavior and the involuntary reaction of the forces operating within man’s body are more or less indefinite. This is correct only as far as it is sometimes not easy to establish whether concrete behavior is to be considered voluntary or involuntary. But the distinction between consciousness and unconsciousness is nonetheless sharp and can be clearly determined.

The unconscious behavior of the bodily organs and cells is for the acting ego no less a datum than any other fact of the external world. Acting man must take into account all that goes on within his own body as well as other data, e.g., the weather or the attitudes of his neighbors. There is, of course, a margin within which purposeful behavior has the power to neutralize the working of bodily factors. It is feasible within certain limits to get the body under control. Man can sometimes succeed through the power of his will in overcoming sickness, in compensating for the innate or acquired insufficiency of his physical constitution, or in suppressing reflexes. As far as this is possible, the field of purposeful action is extended. If a man abstains from controlling the involuntary reaction of cells and nerve centers, although he would be in a position to do so, his behavior is from our point of view purposeful.

The field of our science is human action, not the psychological events which result in an action. It is precisely this which distinguishes the general theory of human action, praxeology, from psychology. The theme of psychology is the internal events that result or can result in a definite action. The theme of praxeology is action as such. This also settles the relation of praxeology to the psychoanalytical concept of the subconscious. Psychoanalysis too is psychology and does not investigate action but the forces and factors that impel a man toward a definite action. The psychoanalytical subconscious is a psychological and not a praxeological category. Whether an action stems from clear deliberation, or from forgotten memories and suppressed desires which from submerged regions, as it were, direct the will, does not influence the nature of the action.” (Mises 2008: 11–12).

It follows that “human action” is to be strictly limited to:

(1) the conscious behaviour of humans;

(2) to exclude unconscious and involuntary behaviour, and

(3) (presumably) to non-mentally ill human beings.

But Mises requires empirical evidence to demonstrate that all these things do not constitute voluntary behaviour with a purpose.

How does Mises know that normal functioning of the organs or blinking of the eyes is not conscious behaviour with a purpose? He might appeal to intuition and personal experience, but his critic can reply (rightly, in my view) that this is just a type of empirical evidence. And, ultimately, it is through empirically-based science that we have good grounds for understanding these things to be involuntary, or for understanding that certain mentally ill people do things with no conscious purpose in mind.

Another example is nervous tics: these are perfect examples of involuntary and compulsive behaviour with no discernible purpose or end in mind. Yet we can only know that nervous tics are involuntary neurological disorders after scientific investigation of such phenomena.

Let us now look at the proposition again:

(1) All human action is purposeful, in the sense of having a purpose or end in mind.

After these careful restrictions on the definitions of terms and the empirical evidence for excluding certain people and actions, the proposition cannot be considered as true a priori or as synthetic a priori: it is a synthetic a posteriori proposition.

It is, frankly, no surprise that the whole fairy tale of praxeology built on a neo-Kantian category or as synthetic a priori knowledge was abandoned by Murray Rothbard who regarded the axioms of praxeology as having a “broadly empirical nature” (Rothbard 2011: 65).

But once one admits that one’s starting axiom is only true a posteriori there is serious problem. Rothbard cannot then claim that all derived inferences and theories of praxeology have apodictic truth because something known a posteriori can never have absolute or apodictic truth: there must be always, even in the most convincing inductive argument, some small degree of doubt or uncertainty about the truth of the induction given the fact that the foundational axiom is not necessarily true. The further consequence that all other axioms of the system are only true a posteriori requires that the theory is indeed grounded in empirical matters of contingent fact, and that, ultimately, must be tested against reality and also describe reality.

I end with some serious questions about Mises’s competence in logic.

Hans Albert points out the following:

“Mises gives a Kantian answer to the question of how the a priori character of praxeological knowledge and its apodictic certainty is to be explained. This knowledge apparently can be reduced to the logical structure of the human mind which is supposed to be the basis for thought and action. ... On the one hand he seems to suggest that he is introducing with his principle of action a synthetic a priori proposition, as he ascribes informational content to the principle. On the other hand, he declares the question of whether the respective propositions are synthetic or analytic to be purely verbal and therefore uninteresting. This seems to show that he was not aware of the connection between analyticity and informational vacuity. He permanently compares his allegedly a priori knowledge with logical and mathematical knowledge and gives such a description of the respective propositions and their mode of derivation that one comes to suspect them to be analytic. He confounds the analytical character of propositions with the logical character of the relationships between propositions in a deduction. But the fact that particular propositions are deducible from particular sets of premises does not render them analytic. For instance, in physics propositions from geometry get an empirical interpretation, and, interpreted in this way, they are synthetic. But propositions which are the result of the ‘logical unfolding’ of certain concepts contain no information. They are analytic not because they are derived, but because they follow from definitions which do not carry information themselves. When Mises tells us that the concept of money already implies all theorems of the theory of money, the alleged certainty of the basis of this derivation does not help him to establish a nonvacuous economic theory. The theory of money as he envisages it here would be without informational content and could not be used to explain anything.” (Albert 1999: 131–132).

Finally, the human mind has been given a certain structure and way of interpreting the world and certain intuitions, which roughly correspond to Kant’s categories, but this structure is undoubtedly the product of Darwinian evolution (Albert 1999: 132), and has been adapted to the experience of an external environment to allow survival and success in that environment. Mises himself acknowledges the role of evolution in this respect (Mises 2008: 33). But our knowledge of these facts and the structure of the mind cannot consist of analytic propositions: it has been discovered by empirical science.

Essentially, this is the view that the universe’s physical and chemical laws appear to be fine tuned, in the sense that if only slight changes occurred in one of the various constants, the universe could not support life. Since it is deemed extremely improbable that the universe would be so finely tuned for life, this is (supposedly) evidence of a designed universe created by some kind of intelligent designer.

It is no surprise that various theists and theistically-inclined philosophers and scientists are partial to this argument.

There are many problems with it. First, there is the counterargument that the universe does not appear to be optimally fined tuned for organic life at all, but perhaps only minimally fined tuned. After all, the vast majority of the universe consists of the mind-bogglingly vast vacuum of intergalactic and interstellar space: this is filled with electromagnetic and particle radiation that is lethal to carbon-based life (except perhaps for the most robust microorganisms).

Secondly, it is far from clear that the emergence of self-replicating molecules and the subsequent evolution of complex carbon-based life is either easy or particularly common in our universe.

Thirdly, even if we could grant that there might be some convincing inductive argument in support of an intelligent designer, why would that designer have to be supernatural? Why not a being or beings who were non-supernatural and who merely arose by Darwinian evolution in another universe? (for example, perhaps such beings may have designed our universe to create stars and black holes, and life was a highly improbable accident, and so on).

But, even if all these concerns are put aside, the overwhelming problem with the fine tuning argument from design is, quite simply, the probability issue. How can anyone ever prove that the current universe with its physical laws is in fact extremely improbable in an objective sense?

This can be stated as follows:

(1) In order to calculate an a priori probability one would need a list of the complete set of possible universes (in a sample space) that might arise from the antecedent conditions before the Big Bang to the point when laws are formed. And not just that, but we must know that all outcomes are equiprobable as well. However, there is not a shred of evidence that anyone can provide either of these things: it is clear that you cannot construct a priori probabilities.

(2) what about relative frequencies? It is utterly impossible to conduct empirical tests of relative frequencies of outcomes in trials because that would require experiments in which we create the universe over and over again to see the types of universes created, and then to obtain a set of such outcomes and ascertain whether stable long run relative frequencies for outcomes occur. Hence no objective relative frequency probability can be constructed for the present universe either.

In short, the very idea that the present universe’s laws are highly improbable is unproven speculation. For all we know, our present universe might be highly probable; or might have a probability of 1; or only be moderately improbable, and so on. At the moment, however, we cannot really say.

The same thing can be said of the question:

“Why is there something instead of nothing?”

This very question presupposes that it is highly probable there should be nothing instead of something. But we have not proven that assumption at all. Perhaps, after all, it is extremely probable that there should be something like the universe instead of nothing (for example, once we get into the strange world of quantum mechanics, with its virtual particles and quantum fluctuations, strange things appear to happen).

Of course, many philosophers and skeptics are well aware of what I have said above, and many years ago the analytic philosopher C. D. Broad made the same point in a critique of the philosophical theologian F. R. Tennant:

“The Design Argument really makes two uses of the notion of antecedent probability. It has to contend both that it is antecedently improbable that the world should be such as it is without being the product of the design, and that the existence of a world-designer has an appreciable antecedent probability. Now, as regards the first point, I cannot see that Dr. Tennant has answered the objection by his distinction between ‘mathematical’ and non-mathematical probability. Is there any sense of probability, mathematical or ‘alogical,’ in which a meaning can be attached to the statement that the antecedent probability of one constitution of the world as a whole is greater than or equal to or less than that of any other? I very much doubt if there is.” (Broad 1930: 479).

These days sophisticated proponents of the fine-tuning argument from design are quick to admit that their probability estimates are not objective, but merely epistemic probabilities derived from inductive reasoning.

But even an epistemic probability depends on the amount or degree of relevant knowledge (Skyrms 2000: 23), and if this isn’t an example of an issue where we face something close to radical uncertainty (in the Keynesian sense) – where the weight of evidence must be very small (perhaps close to 0) – then I don’t know what is.

Thursday, July 25, 2013

This is a prolegomena to a discussion of the status of Mises’s human action axiom and praxeology. Mises is usually thought to have argued that the human action axiom had a “synthetic a priori” status. Whether that is credible is highly questionable.

But before a serious discussion of this issue, some comments about epistemology are necessary. Hence this post.

“Epistemology” is the branch of philosophy concerned with the theory of knowledge. How do know truths? What kind of knowledge and truths are there?

Though it is a simplification, in essence there are four positions held since the late 18th century on the kinds of knowledge:

(1) The radical view of Willard Van Orman Quine that the analytic–synthetic distinction is a dogmatic myth;

(2) the empiricist view, associated with the logical positivists, that there are only two relevant distinctions:

(i) analytic a priori, (ii) synthetic a posteriori, and (iii) the synthetic a priori;

(4) the view of Saul Kripke that, as well as the analytic and synthetic, there are additional kinds of knowledge:

(i) contingent a priori;(ii) necessary a posteriori.

In addition, the basic conceptual distinctions in the nature of propositions and truth can be given, as follows:

(1) analytic versus synthetic;

(2) a priori versus a posteriori; and

(3) necessary versus contingent.

The analytic versus synthetic distinction, formulated properly by Immanuel Kant, is usually taken to refer to propositions (or statements).

A statement that is true solely by virtue of the meaning or definition of the terms used is analytic, and it has logically necessary truth. This means that a denial of such a proposition would entail self-contradiction.

An older definition (used by Kant) is that a proposition whose predicate expresses ideas conceptually already contained (explicitly or implicitly) in the subject is analytic, such as the following propositions:

(1) All sad widows are sad.

(2) all red coloured things are red.

(3) all bachelors are unmarried.

(4) All (normal) bipeds are two-footed.

(5) All triangles have three sides.

In propositions (1) and (2) above, you can see that the idea expressed in the predicate is already explicitly verbally contained in the subject (or, strictly speaking, in the noun phrases that function as the subject). In propositions (3), (4), and (5), the predicate expresses an idea implicitly contained in the subject, which is to say that the subject already carries that idea in its implicit definition, as understood in a language or community of speakers.

Analytic propositions are true a priori (or prior to or without experience, experimentation, or empirical evidence) and are necessarily true (and their negation is impossible).

Such propositions are called analytic a priori.

Many such propositions can be regarded as tautologies and are non-informative, in the sense that they do not by themselves add new information to our knowledge of the world, because the knowledge in the predicate was already contained in the subject or deducible from it. Another way of saying this is that many are often trivial truths.

All propositions that are not true by virtue of the terms used are synthetic, and their negation is logically possible. Another way of saying this is that the predicate does not express an idea contained in the subject:

(1) Some widows are sad.

(2) Some swans are black.

(3) the earth’s sun contains hydrogen and helium.

Here the predicate is not obviously contained in the subject of the propositions, and the propositions are true a posteriori, or by means of experience, experimentation, or empirical evidence (although often this empirical verification has already been done by people before us). They have contingent, not necessary truth. Such propositions are called synthetic a posteriori.

But there is one more type of proposition proposed by philosophers and logicians, as we can see here (listed after the other two I have described above):

(1) analytic a priori;

(2) synthetic a posteriori, and

(3) synthetic a priori.

This is (3): the synthetic a priori proposition. Nevertheless, the existence of synthetic a priori propositions is debated.

Some proposed examples can be given:

(1) nothing is both green and red all over.

(2) all events are caused.

Are these, as Kant thought, synthetic a priori, in the sense that they are necessarily true but not analytic (that is, not vacuous)?

Consider the proposition that “all events are caused.” Supposedly, this is synthetic a priori and necessarily true. But modern quantum mechanics would appear to cast doubt on that idea (in its conventional sense) since it is believed by some scientists that certain quantum mechanical events can be uncaused. At the very least, there is genuine dispute and, ultimately, the proposition that “all events are caused” was arguably really just a synthetic a posteriori proposition, and never had necessary truth.

The logical positivists denied the existence of synthetic a priori knowledge, and argued only two real distinctions are useful and valid:

(i) analytic/a priori, and

(ii) synthetic/a posteriori.

By contrast, Willard Van Orman Quine (1908–2000) attacked this view in his famous article “Two Dogmas of Empiricism” (1951; reprinted in Quine 1981), in which he argued that the analytic versus synthetic distinction does not exist. Although this paper was directed against the logical positivists, its thesis is equally damaging to apriorist rationalists, and in fact Quine was himself an empiricist.

Moreover, in Quine’s view, synthetic a priori do not exist either.

However, many think Quine’s critique is ultimately unconvincing (Grice and Strawson 1956), and that a strong case for the existence of analytic propositions can be made. I agree with this.

For example, Putnam argued that there is an analytic versus synthetic distinction but that it is ultimately a trivial one (Putnam 1962: 361). He also contended that there are a vast number of propositions that cannot be easily classified into either category (Putnam 1962: 364), and a better model is one with three classes:

(1) analytic(2) synthetic(3) various other kinds (Putnam 1962: 364).

Putnam (1962: 370) points out that modern science has revised the status of propositions which previous scientists or philosophers thought were a priori true as analytic statements, but which subsequently turned out to be synthetic statements which were false.

A fundamentally influential work was Saul Kripke’sNaming and Necessity (1980) (on Kripke, see Berger 2011; Sosa 2006; Burgess 2013; Hughes 2004). This advocated an even more complicated view. Kripke held that the notion of “necessity” as distinct from “contingency” must be metaphysical/ontological, whereas the “a priori” versus “a posteriori” distinction is epistemic (Scruton 1994: 162). The synthetic versus analytic distinction is semantic.

These concepts do not coincide, and Kripke presented arguments for additional types of knowledge, such as:

(i) the contingent a priori;

(ii) the necessary a posteriori.

Kripke also argued that identities are necessarily true, that names are “rigid designators,” and that some things have real essences (Scruton 1994: 164). This leads into the idea that “necessary a posteriori” truths exist: such as, for example, that the “morning star is the evening star” (namely, the planet Venus). On Kripke’s theory, that identity is necessary, but was discovered empirically: hence it is a “necessary a posteriori” proposition.

Another category is the “contingent a priori,” such as the idea that we know a priori that a metre rod is a meter long, but nevertheless “metre” could have been historically and scientifically defined at a different length (so it is therefore contingent).

But whether Kripke’s argument for “contingent a priori” propositions really succeeds is disputed (Scruton 1994: 165). At first glance, Kripke’s “contingent a priori” looks similar to Kant’s “synthetic a priori,” but on closer inspection there is an important difference. Kant’s “synthetic a priori” knowledge cannot be contingent, but Kripke’s “contingent a priori” can.

Though it is a subject for another post, the only epistemology capable of supporting Mises’s human action axiom, with its alleged “synthetic a priori” status, is really the Kantian theory of knowledge. But Kantian epistemology looks rather outdated in terms of the modern theory of knowledge.

Wednesday, July 24, 2013

Some anonymous commentator, in a previous post, complains that the word “Freud” did not actually “appear” in the passage in Human Action where Mises says that praxeology “owes much to psychoanalysis” (Mises 2008: 12), presumably with the implication that Mises wasn’t endorsing Freudian psychoanalysis.

I disagree. And we need only look at a passage from Liberalism: A Socio-Economic Exposition:

“It cannot be the task of this book to discuss the problem of social cooperation otherwise than with rational arguments. But the root of the opposition to liberalism cannot be reached by resort to the method of reason. This opposition does not stem from the reason, but from a pathological mental attitude – from resentment and from a neurasthenic condition that one might call a Fourier complex, after the French socialist of that name.

Concerning resentment and envious malevolence little need be said. Resentment is at work when one so hates somebody for his more favorable circumstances that one is prepared to bear heavy losses if only the hated one might also come to harm. Many of those who attack capitalism know very well that their situation under any other economic system will be less favorable. Nevertheless, with full knowledge of this fact, they advocate a reform, e.g., socialism, because they hope that the rich, whom they envy, will also suffer under it. Time and again one hears socialists say that even material want will be easier to bear in a socialist society because people will realize that no one is better off than his neighbor.

At all events, resentment can still be dealt with by rational arguments. It is, after all, not too difficult to make clear to a person who is filled with resentment that the important thing for him cannot be to worsen the position of his better situated fellow men, but to improve his own.

The Fourier complex is much harder to combat. What is involved in this case is a serious disease of the nervous system, a neurosis, which is more properly the concern of the psychologist than of the legislator. Yet it cannot be neglected in investigating the problems of modern society. Unfortunately, medical men have hitherto scarcely concerned themselves with the problems presented by the Fourier complex. Indeed, they have hardly been noticed even by Freud, the great master of psychology, or by his followers in their theory of neurosis, though it is to psychoanalysis that we are indebted for having opened up the path that alone leads to a coherent and systematic understanding of mental disorders of this kind.” (Mises 1978: 13–14).

So there you have it!: opposition to classical liberalism is apparently to be blamed on the widespread “neurosis” elucidated by psychoanalytic theory developed by the followers of Freud, “the great master of psychology.”

While Freudian psychoanalysis was later developed by Alfred Adler and Carl Gustav Jung, it is hard not to see their theories as anything but an equally deluded legacy of Freud’s work.

If this isn’t proof that Mises was a supporter of Freudian psycho-babble, then I don’t know is.

Underlying all these videos is the idea is that, if only prices and wages were perfectly or near perfectly flexible, then economic problems would be resolved.

The glaring hole in this argument is the inability to consider the macroeconomic effects of debt deflation: if debts are nominally fixed, cutting wages and prices will simply exacerbate the real burden of debt, putting pressures on debtors, and eventually driving up the level of bankruptcies which in turn is liable to cause losses and even bankruptcies to creditors.

Another problem is that the only significant period that Austrians can point to as a time of “good” deflation, the 1873 to 1896 era, turns out to have had serious economic problems related to the price deflation and (most likely) debt deflationary dynamics of that era:

Tuesday, July 23, 2013

“The theme of praxeology is action as such. This also settles the relation of praxeology to the psychoanalytical concept of the subconscious. Psychoanalysis too is psychology and does not investigate action but the forces and factors that impel a man toward a definite action. The psychoanalytical subconscious is a psychological and not a praxeological category. Whether an action stems from clear deliberation, or from forgotten memories and suppressed desires which from submerged regions, as it were, direct the will, does not influence the nature of the action. The murderer whom a subconscious urge (the Id) drives toward his crime and the neurotic whose aberrant behavior seems to be simply meaningless to an untrained observer both act; they like anybody else are aiming at certain ends. It is the merit of psychoanalysis that it has demonstrated that even the behavior of neurotics and psychopaths is meaningful, that they too act and aim at ends, although we who consider ourselves normal and sane call the reasoning determining their choice of ends nonsensical and the means they choose for the attainment of these ends contrary to purpose.

The term ‘unconscious’ as used by praxeology and the terms ‘subconscious’ and ‘unconscious’ as applied by psychoanalysis belong to two different systems of thought and research. Praxeology no less than other branches of knowledge owes much to psychoanalysis. The more necessary is it then to become aware of the line which separates praxeology from psychoanalysis.” (Mises 2008: 12).

What was that?

Despite an attempt to separate praxeology from psychoanalysis, Mises says that praxeology owes much to Freudian pseudoscience? That should come as a great surprise to people who insist that Human Action is one of the greatest economic books ever written.

Of course, one can counter that, ultimately, maybe Mises’s implicit ideas about psychology can be stripped of any questionable Freudian elements, and made to conform with modern psychology, without harm to his fundamental economic ideas. Perhaps. After all, wasn’t Keynes also partial to aspects of Freudian psychoanalysis? (the answer to which is: yes, partly).

But the fact remains that praxeology is said by Mises, in the fundamental first Chapter of Human Action, to “owe much” to Freudian psychoanalysis. That requires a clarification from Austrians about how this does not render Mises’s underlying psychology suspect.

Saturday, July 20, 2013

So one gets the impression from this (admittedly, by implication) that the interventionist Hoover was pursuing a “New Deal Lite,” and that these interventions were what greatly exacerbated the Great Depression.

I do not deny that some of Hoover’s interventions were counterproductive, nor that Hoover was a limited progressive.

But there is a glaring contradiction here. Steve Horwitz is an Austrian in the monetary equilibrium tradition. Like Hayek, Horwitz thinks that Hoover should have intervened via the Federal Reserve to save the American banking and financial system from collapse (even if as a “second best option”). And I would agree that preventing the bank runs and financial collapse in the early 1930s would have been one of the best government policies to prevent the depth of the Great Depression.

Logically, Horwitz must agree that

(1) Hoover was in theory (if not in practice) right to reject the strict liquidationist solution of Mellon (and incidentally of Murray Rothbard).

(2) Hoover should have intervened in some ways, such as the stabilisation of the banking system;

(3) Hoover’s failure in one important way with respect to the banking crisis is that he failed to properly intervene, and to the proper extent: a laissez faire policy here was entirely wrong.

Yet Hoover gets no credit for rejecting extreme laissez faire liquidationism, which, logically, under Horwitz’s own monetary equilibrium approach, is conceptually the right thing to do.

Let us turn to some of Hoover’s interventions.

First, fiscal policy. Hoover’s fiscal policy in fiscal years 1930 (July 1, 1929–June 30, 1930) and fiscal year 1933 (July 1, 1932–June 30, 1933) was contractionary. In fiscal year 1930, he ran a federal government budget surplus. In fiscal year 1933, he attempted to balance the budget. In fact, in 1932, he write of “the urgent need of the country for prompt passage of the emergency legislation and balancing of the budget” through tax increases (Hoover 1953: 136). Not only was this an urgent need, but he saw it as a “... necessity for balancing the budget as the next item on the recovery program” (Hoover 1953: 138, in a message to Congress, 5 May 1932). Austrians in general seem to be strongly in favour of government reining in spending during a recession and budget balancing. Yet these policy measures of Hoover that are consistent with their policy prescriptions are strangely forgotten as Hoover is accused of being an interventionist on some unprecedented scale.

By contrast, all Keynesians agree that Hoover’s contractionary fiscal policy in 1929–30 and 1932–33 was the wrong thing to do.

In fiscal years 1931 and 1932, fiscal policy was mildly expansionary, but feeble compared to what was needed. Hoover destroyed the US economy not because of government interventions per se, but because of the wrong type of government interventions (i.e., austerity) and government interventions that were too weak and ineffective (i.e., weak fiscal policy).

Secondly, let us consider the Reconstruction Finance Corporation (RFC). Blaming the RFC as some evil government intervention that made the depression worse is absurd. Why? Because the RFC was only established in January 1932, and it did not even exist in 1929, 1930 and 1931 when the US economy was collapsing badly. In 1932, the RFC spent about $1.5 billion in loans to states and businesses, and there are very good reasons for thinking that this policy per se would have aided the economy, not exacerbated the depression. But of course whatever good the RFC did was destroyed by Hoover’s contractionary fiscal policy in fiscal year 1933 – the exact opposite of a Keynesian policy response (at the end of the video, Horwitz mentions in passing a part of this fiscal contraction: the tax increase in 1932–1933).

Finally, the Austrians point to this address by Hoover, as proof of his interventionism and progressive politics.

It does indeed illustrate the limited interventions Hoover pursued, and it is certainly correct that Hoover had a broadly corporatist and limited progressive mentality.

But it also strongly confirms that Hoover’s conceived of his policies as primarily providing relief from privation and distress, not as a set of policies that were supposed to end the depression. Fundamentally, he rejected what we now call Keynesian economics.

It is entirely consistent with Hoover’s description of the major policy aim of his rejection of liquidation, which was merely to “cushion the situation,” or relieve distress:

“Two schools of thought quickly developed within our administration discussions.

First was the ‘leave it alone liquidationists’ headed by Secretary of the Treasury Mellon, who felt that government must keep its hands off and let the slump liquidate itself. Mr. Mellon had only one formula:

‘Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.’ He insisted that, when the people get an inflation brainstorm, the only way to get it out of their blood is to let it collapse. He held that even a panic was not altogether a bad thing. He said: ‘It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.’ He often used the expression, ‘There is a mighty lot of real estate lying around the United States which does not know who owns it,’ referring to excessive mortgages.

....

But other members of the Administration, also having economic responsibilities—Under Secretary of the Treasury Mills, Governor Young of the Reserve Board, Secretary of Commerce Lamont and Secretary of Agriculture Hyde—believed with me that we should use the powers of government to cushion the situation. To our minds, the prime needs were to prevent bank panics such as had marked the earlier slumps, to mitigate the privation among the unemployed and the farmers which would certainly ensue. Panic had always left a trail of unnecessary bankruptcies which injured the productive forces of the country. But, even more important, the damage from a panic would include huge losses by innocent people, in their honestly invested savings, their businesses, their homes, and their farms.” (Hoover 1953: 29–30).

That is underscored in his memoir when he announced his disillusionment with the effects of the minimal public works programs (compared to GDP collapse) implemented to that point:

“The first limitation was that the construction and capital goods’ industries were the most sensitive to depression forces. They could mostly be postponed until another day. They could decrease by $8,000,000,000 per annum. To replace such volume with governmental public works would require that much of an increase in government expenses—or a rise of 400 per cent in the taxes of those times. Certainly such works as were possible proved to be no economic balance wheel in depressions.” (Hoover 1953: 144).

In other words, Hoover never saw his public works programs in Keynesian terms, and did not conceive of using large deficits to finance such a public works program designed to make up for the shortfall in private sector investment.

Friday, July 19, 2013

“There is a long 400–500 year history that demonstrates repeatedly, time and time again, that past and current speculation always leads to some kind of future economic problem.

Keynes recognized that financial markets, for the last 400–500 years since the introduction of modern, fractional reserve banking, exhibited the same speculative pattern over and over and over and over again. …. Obama, Bernanke, and Geithner … bailed out the Wall Street speculator crowd again, just as they were bailed out in the early to late 1980’s by Paul Volcker and late 1990’s–early 2000’s by Alan Greenspan. The result is that another bubble in the stock markets is being created. These financial bubbles are ergodic because the same pattern repeats again and again. New types of financial assets and financing are created by the banking industry. In the 1920’s, for example, these new financial assets were balloon payments for houses and margin account financing for stocks. The creation of these new types of assets is called securitization. The next step is debt leveraging. This allows speculators and speculating bankers to maximize their speculative debt financing. The growing bubble is fed by herding and copycat behavior that automatically leads to the creation of a larger and larger bubble. The next stage occurs as the bubble leads to a mania, which leads to a panic, which inevitably leads to a crash, which always leads to an economic downturn, recession, or depression of some sort. These kinds of events are stationary because they keep repeating over and over again. Their ultimate collapse can be predicted with a probability approaching 1. However, they are not normally distributed. One can’t use the normal distribution to describe the time series data in financial markets. The underlying processes are given by the Cauchy distribution.”
Michael Emmett Brady, September 18, 2009
http://www.amazon.com/review/R32PPK2MQ5SQUG

I find the idea that the repeated rise and fall of bubbles per se in capitalism to be ergodic worthy of further investigation.

Of course, one needs a strict definition of ergodicity and stationarity.

But another issue is how one defines “bubble.” It is entirely conceivable that a small or moderate bubble might in fact stabilise, reach plateau and then further bull or bear markets may follow, instead of simply deflating in a significant way.

Of course, if one wants to limit the definition of “bubble” used here to large, debt-fuelled bubbles, which really destabilise asset prices wildly, then the idea that the collapse of such bubbles “can be predicted with a probability approaching 1” is not so unreasonable, even though I assume that such a probability value would be what Keynes called non-numerical (Keynes 1921: 160), and cannot be understood as in the same class as a priori probabilities.

Brady, Michael Emmett, 1983. The Foundation of Keynes’s Macrotheory: His Logical Theory of Probability and its Application in the General Theory and After, Ph.D. Dissertation, University of California, Riverside.

Brady, Michael Emmett, 2010. “How to Use Keynes’s Conventional Coefficient of Risk and Weight, c, to clear up Misunderstandings and Confusions about Keynes’s Views on the use on his Principle of Indifference Versus the use of Laplace’s Principle of Nonsufficient Reason,” SSRN Working Paper Series (November 27).http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1716043

Davis, John B. 2003. “The Relationship between Keynes’s Early and Later Philosophical Thinking,” in Jochen Runde and Sohei Mizuhara (eds.), The Philosophy of Keynes’ Economics: Probability, Uncertainty and Convention. Routledge, London and New York. 100–110.

Gerrard, B. 2003. “Keynesian Uncertainty: What Do We Know?,” in Jochen Runde and Sohei Mizuhara (eds.), The Philosophy of Keynes’ Economics: Probability, Uncertainty and Convention. Routledge, London and New York. 239–251.

Gillies, Donald. 2006. “Keynes and Probability,” in R. Backhouse and B. Bateman (eds.), The Cambridge Companion to Keynes Cambridge University Press, Cambridge and New York. 199-216.

Gillies, Donald. 2003. “Probability and Uncertainty in Keynes’s Economics,” in Jochen Runde and Sohei Mizuhara (eds.), The Philosophy of Keynes’ Economics: Probability, Uncertainty and Convention. Routledge, London and New York. 111–129.

O’Donnell, R. M. 1989. Keynes: Philosophy, Economics and Politics: The Philosophical Foundations of Keynes’s Thought and their Influence on his Economics and Politics, Macmillan, Basingstoke.

O’Donnel, R. 2003. “The Thick and the Think of Controversy,” in Jochen Runde and Sohei Mizuhara (eds.), The Philosophy of Keynes’ Economics: Probability, Uncertainty and Convention. Routledge, London and New York. 85–99.